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Introduction

Jan Flenderson, marketing manager at Awesome Bits Games (ABG), was starting to get worried. The Kickstarter crowdfunding campaign for the latest company board game, Undead Rising, had gone live at 3 p.m. on July 10, 2018, and four hours later the negative online comments were piling up. Complaints were nothing new for Flenderson; they sold relatively expensive games and customers were demanding. What concerned her was that she had tweaked the pricing scheme for this game, trying something new, and this was the basis for most of the comments. The pricing change was instigated by the inclusion of a novel component in the game, a giant 18" high three-dimensional plastic piece named "the Swarm," required only for the game's final chapter. To price "the Swarm," Flenderson, in consultation with game designer Derek Oakley, CEO Marta Li, and CFO Andrew Haverchuk, devised a new plan. The game alone would be priced at USD 100 (same as previous ABG products), but the game including "the Swarm" would increase in price as the crowdfunding campaign continued. The first 100 project backers would get these items for USD 220, and then the price would increase by USD 5 for each subsequent 100 backers. The first 100, available at USD 220, sold out within minutes. Although sales of the basic version and "the Swarm" bundle remained strong and rose, so did the negative comments. Accusations of price gouging were made, but that did not concern Flenderson because every crowdfunding campaign she had run generated similar comments. What really made her begin to worry were the many comments simply reading "I'm out," or some variation on that, indicating a prospective backer who was opting to keep their money. These were customers who had gone to the Kickstarter page for the project, likely intending to back it, and had decided against it. Had she made a mistake with this pricing scheme? Flenderson sent an e-mail to Li, Haverchuk, and Oakley to arrange an emergency meeting.

Hobby Board Games

In 2018, the hobby board game market was booming. Sales had consistently increased during the previous decades, and year over year sales increases hovered around 20%. Since the mid-1990s, games beyond the typical toy store lineup of Monopoly, Clue (called Cluedo in some parts of the world), and Scrabble had invaded shelves worldwide, and within 20 years they were big business. Sales in 2016 of hobby games were USD 1.4 billion and growing. These games tended to be slightly more complex and aimed at adults, not kids. They also boasted better production value and art and required more thought and strategy, relying less on luck. While many hobbyists tried their hand at designing and publishing games (leading to more than 3,500 games published in 2017), the industry was dominated by a few very large publishers (including ABG)

Awesome Bits Games

ABG was a leader in the board game market. The company, founded by Li and Haverchuk in 2001, had begun as a website on which hobby board gamers could post pictures of game components, mostly homemade and/ or hand-painted. Users on the website would rate the components as either "awesome" or "not awesome." Drawing on the existing user base of the website as a loyal following and contacts made in the hobby board game industry, ABG began publishing games in 2010 and had grown significantly since then. Sales of ABG board games were USD 15 million in 2015 and USD 20 million in 2016.

The games created and published by ABG tended to have dark themes (the apocalypse, zombies, etc.), slightly complex rules with much player interaction, and contained a very large number of plastic game pieces. ABG stayed true to its original focus of high-quality game components in its own games, and its customers expected to buy a box full of intricately detailed plastic pieces. This led to ABG games having a higher sale price point than most games (typically around USD 100 per game, compared to an industry averages of USD 40-50) but customers still felt they received value for money. Of that USD 100 price tag, manufacturing costs were about 8%, distributors collected 10%, and retailers received 50% (crowdfunding projects required distribution but removed the need for retailers).

In 2017, ABG found itself in the unexpected position of being the second-largest independent board game publisher in the world. Two years earlier it would not have been in the top 20, but a combination of rapid company growth and industry consolidation resulted in its ascent in the rankings. Asmodee, a French hobby game company and the largest in the world in terms of revenue, had acquired the next three largest companies during an 18-month period beginning in 2015. Their aggressive growth strategy, relying on acquisition over organic growth, led to more and more buyouts and consolidation. In contrast, ABG rarely acquired other companies and chose to grow organically, which it did at a rate that surpassed overall industry growth.

Jan Flenderson

The rapid growth of ABG necessitated the hiring of new managers, and no area within the company was in need of greater help than marketing. Haverchuk and Li were programmers first and foremost, with Haverchuk's limited background in finance providing a justification to make him CFO. The co-founders were learning as they went, and to take off some of the pressure, they hired an experienced marketing manager, Flenderson, in 2013.

Jan Flenderson had an MBA from a northeastern business school and had worked for several years as a brand manager at a major packaged-goods company. She was a personal acquaintance of Marta Li, which is how she became aware of the opportunity and brought big-company practices and procedures to what was, at the time, a somewhat haphazard operation. She was also instrumental in recruiting managers for human resources and operations, both of whom were contacts she had made in business school. The company growth continued as Flenderson and the other new managers grew into their roles. Flenderson did not know much about hobby games prior to taking the position at ABG, but she did have legitimate knowledge of, and experience with, marketing strategy and tactics. Her skills were not perfectly transferable from one industry to another, but with a solid foundation in marketing, and the relatively new growth of the hobby board game industry, Li, Haverchuk, and Flenderson herself believed in her ability to learn the industry and its customers while on the job. For all the added professionalism she brought to the company, though, she was loath to change core values and procedures of ABG and supported the continued use of crowdfunding as a launching pad for company products.

CrowdfundingKickstarter

A major component of the ABG sales and marketing tactics was the use of crowdfunding, specifically Kickstarter. Crowdfunding is an online method of selling, wherein projects of all kinds (not only games, but also movies, music, books, art, etc.) are posted and "backers" can support the project financially, usually in exchange for rewards. For example, a band might post a project on a crowdfunding site (such as a new studio album) and backers would pledge money in exchange for a reward (ranging from a non-specific "thank you," to a copy of the album, to a backstage experience with the band, depending on the amount contributed). For hobby board games, the reward was typically the game, with some perks such as exclusive content.

Kickstarter, a crowdfunding platform, is extensively used by board game publishers, and hobby games formed the single largest category in terms of revenue on the site. In 2017, 2,106 hobby game projects together earned USD 137 million in revenue through the site. In exchange for use of its platform, Kickstarter took a fee that amounted to 8% of the revenue and USD 0.20 per pledge. Each project on Kickstarter had a stated funding goal, and if this goal was not met, the project would not be funded and no money would be collected from backers.

The ABG projects on the site were some of the biggest earners for Kickstarter, and the company had run 30 Kickstarter projects by July 2018 (see Exhibit 1 for previous ABG Kickstarter projects). These campaigns had followed a predictable pattern, both from the company and the customer's perspective. ABG would have one version of the game available (no deluxe version) at USD 100, and then during the campaign (usually two to four weeks), it would unveil new content. Some of this content was in the form of "stretch goals," which could lead to free rewards. That is, as the overall funding level of the campaign rose, each backer would receive more and more rewards for their USD 100 pledge (i.e., for "free"). Other content was available as "add-ons," meaning that the customer would need to increase the amount of their pledge to be able to receive this material. From the company perspective, Kickstarter campaigns usually opened strong or not at all; about 50% of the overall revenue from an ABG Kickstarter was earned in the first four hours. Therefore, if a board game project did not get to about 50% of the funding goal quickly, the project was unlikely to ever hit the funding goal. Although ABG had never failed to meet its goal (and had generally greatly exceeded goals), this pattern spoke to the pattern of funding. Backers could cancel their pledges any time before the campaign ended (funds were locked in after that). In recent years, about 55% of ABG board game revenue was derived through the Kickstarter avenue.

Historically, ABG had tried different approaches with its campaigns. There had been experimentation with very pricey, exclusive pledge levels that cost many times the price of the games. With this type of campaign, a small number of customers could receive a once-in-a-lifetime opportunity, such as to play the game with the designer or to have a character in a game based on the backer. This practice was discontinued within the first few years. ABG had also used "early-bird" prices, meaning that those who backed within the first 24 or 48 hours got a slightly lower price for the same material. This practice was also discontinued, the reason provided to customers being early-bird pricing was unfair because not everyone was hyper-aware of when projects began, so those less "in the know" could not take advantage of the lower price. Another, internal, reason was that so many backers pledged early that the lower price was essentially selling games for an unnecessarily low price.

The New ProjectUndead Rising

Undead Rising was similar in many respects to past projects: it was designed by Derek Oakley, the company's lead board game designer, it was playable in multiple sessions that together told an overall story, it contained dozens of plastic miniatures of heroes and monsters, and the base price was USD 100. This game, however, had an add-on purchase that literally dwarfed anything that came before it. To finish the story contained within the multi-session gaming experience, a large plastic component was needed. The final chapter of the game was played on "the Swarm," a 14" by 14" by 18" piece that represented a ruined city overrun by a horde of zombies. ABG had never created a piece like this before and most players had never played on one.

Flenderson knew that a USD 100 price would not work for this component as it did not fit with the ABG cost structure. The manufacturing cost alone of this piece was USD 16 (twice the cost of producing the basic game itself), and shipping costs would be higher than usual as well. Based on the usual cost and revenue analysis, the piece should retail for USD 200, which far exceeded most customers' budgets. Flenderson decided that the piece could work as an add-on for the Kickstarter project and never be sold at retail (a few previous ABG titles had only been sold on Kickstarter and never at retail, due to an expected small audience beyond loyal fans). Because there was no retailer share, a price of USD 100 to USD 150 could be offered for the add-on.

Haverchuk supported this pricing model, as did game designer Derek Oakley. They cited past experience with add-ons and Kickstarter campaigns and believed that there were sufficient interested customers to make the add-on worthwhile. Marta Li deferred to Flenderson's decision, and the marketing manager had a few misgivings about it:

ABG had never had an add-on this expensive before. The previous campaigns included add-ons with a maximum of USD50, and the planned add-on would be three times that amount.

She was worried about customer backlash. Add-ons were usually unveiled a few days into the crowdfunding campaign, by which point more than 50% of people who would eventually back the project already had. Flenderson was concerned that customers would feel betrayed if they committed to spend USD 100 and then later found out that an additional USD 150 would be needed to truly complete the story of the game.

Economies of scale did not apply to "the Swarm" because the plastic-injection molds used for a unit that size would wear out quickly. Orders would need to be in the tens of thousands (much more than expected) to realize a per-unit cost reduction.

Shipping would be adversely affected. Although it was quite common for Kickstarter projects to ship their rewards to backers later than promised, ABG had a very good track record of on-time (or even early) shipping. "The Swarm" would involve much more time to produce, so shipping all the rewards at the same time would push back delivery for all backers, not just those who ordered the add-on.

Flenderson set to work on an alternative pricing strategy. The final result was to offer two tiers of rewards right from the start of the campaign, one including "the Swarm" and one without. The base game, without "the Swarm," would be USD 100. For "the Swarm" price Flenderson drew on what she had seen in other Kickstarter projects, such as exclusive pledge levels and early-bird pricing.

Driven by the above concerns, Flenderson decided to price the bundled product starting at USD 220, with the price increasing by USD 5 with each 100 backers. This (a) provided the opportunity to purchase it at a discount; (b) ensured all backers knew about "the Swarm" from the start of the campaign; (c) kept margins large despite the lack of economies of scale; and (d) provided staggered delivery dates by splitting backers into groups of 100.

From the customer's viewpoint, they would go onto the Undead Rising project page and see two available options: the USD 100 option and whichever bundle option was active at that time, depending on how many pledges had been made thus far. Limited functionality on the Kickstarter platform caused two challenges, but Flenderson did not think they were serious. First, because pledge levels could not be removed from the page, customers would see all of the "full" pledge levels for the bundle (i.e., if a backer was pledging at the USD 240 level, she would see that there had been a USD 220, USD 225, USD 230, and USD 235 level but that these were each sold out). Second, because there was no way to automate the creation of new pledge levels, someone at ABG would need to manually update the page to include each new level.

Success and Crisis

The Undead Rising project went live on Kickstarter at 3 p.m. (EDT) on July 10, 2018. Within one minute, the USD 220 level for the bundle sold out. By 3:14, the project reached its USD 200,000 funding goal, and by 3:22, the bundle price had already reached USD 250. By any measure, the project was successful and on track to match or beat previous ABG projects.

Flenderson was still concerned, however, because ABG had not been able to keep up with the incredible pace of demand. The manual updates to the page, creating the new bundle pledge levels, each sold out in less than three minutes. She could see on the project comment page that some prospective backers were becoming frustrated, as they waited for a new level to be opened only to miss out on pledging at that price in the frenzy that followed.

Though she had learned long ago not to put too much stock in Internet comments, Flenderson thought that there were many more negative comments than in the past, and the tone was angrier. Gradually the pace of customer demand slowed, but the negative comments continued to be posted. Many stated that they would have backed the project but were angry at the "price gouging" and "unfair practices" of ABG (see Exhibit 2 for a sample of these complaints).

Relief at the success of the project increasingly evolved into concern. Flenderson knew that she was responsible for pricing and needed to know that the company would back her decisions. She also knew that projects were flexible enough that it was not too late to make changes. If she had more time, she would have undertaken a more rigorous examination of the comments and social media activity around the campaign, but with Undead Rising already live, a decision to take immediate action (or not) was needed.

At 7 p.m., four hours into the campaign, the project had raised over USD 1.25 million from backers, 1,837 people had pledged for the bundle, for which the price was currently at USD 310. The comment page was overrun by negativity from backers and non-backers alike, with the former stating that they would keep their pledge but not buy from ABG in the future, and the latter chiding and mocking those who were turning over their "hard-earned money to those greedy bastards." Flenderson decided to do something: she contacted Li, Haverchuk, and Oakley for an emergency meeting. Even though it was evening, everyone was still at the office for Kickstarter launch day, so getting them together in the conference room was easy.

The Emergency Meeting The following is a transcript of the meeting that began at 7:14 p.m. in the conference room at ABG.

Flenderson: I've called you all here because I'm very concerned. I've noticed that

Haverchuk: Concerned? We've had a great launch! Right on track to do as well as our past stuff.

Li: What concerns you, Jan?

Flenderson: I've noticed that customers are very unhappy with the way the add-on is priced. Those that have backed it feel ripped off, and many people have stated that they would not back the project, even though they had planned to.

Haverchuk: Yeah, they always complain but then they come back for the next game. We make quality stuff, and customers love 'em.

Oakley: I'm reading some of it too; I've had to because my Twitter is blowing up. People have been asking me about this all day. Not the game, but the price. I keep telling them that I'm not involved in that, but they still want answers from me.

Flenderson: Sorry about that, Derek, but you are one of the prominent public faces of the company. No one knows me, Andrew, and Marta. Your name is on the game box.

Oakley: I get it, but I just don't know what to tell them. And to tell the truth

Haverchuk: Tell them that they're getting a bigger game piece than they can imagine, and even at USD 400, it would be a great deal!

Oakley: as I was saying, to be honest it bugs me. I'm a member of the gaming community, I see people at conventions, I don't want to be called a money-grubbing business type. No offence.

Haverchuk: None taken, I guess.

Flenderson: Getting back to the issue at hand, I need to know from you whether you think we should make any changes at this point.

Li: Changes now? The project is live.

Flenderson: Yes, but we can always change things. I've sketched out a few options. First, we could leave things as they are, continue to raise the price five dollars with each 100 backers. Haverchuk: Yes.

Flenderson: A variation on that strategy would be that we could provide an explanation for why we priced it as we did in one of the campaign updates. Get into the nitty-gritty of why it's so expensive, production costs, shipping, and so on.

Haverchuk: Fine, I guess. Oakley: Uh, I don't know if that's going to fly.

Flenderson: Second, we could simply stop increasing the price where it is now and open up that pledge level to an unlimited number of backers. So anyone who has not bought the bundle could get it at USD 310, and we wouldn't raise it from there.

Li: Seems reasonable.

Flenderson: Third, and last, we could roll back the price to a lower level, like USD 250, and anyone who pledged at a higher amount than that would get their pledge reduced to that level. Those who got it cheaper, the first few hundred backers, would keep their price.

Li: I don't know about that one.

Haverchuk: I'm not in favor of giving money back.

Flenderson: We haven't collected any money and won't until the campaign ends in two weeks. We're not giving money back, we're just going to collect less.

Haverchuk: Same difference. Oakley: I like that one, sort of apologize for what we did and try and make it right.

Haverchuk: Am I the only one trying to run a business here? We have customers, hundreds of them, who are willing to fork over more than USD 250 for this, so why stop them?

Flenderson: There are future add-ons to the project, they're less likely to buy those. There are future projects

Haverchuk: Those other add-ons are small potatoes, the biggest one is USD 50 and most are USD 20 or less. Minus costs. We're giving back pure profit! Oakley: We're also ruining our good name!

Li: He's right, our brand is at stake too. We need these customers. Haverchuk: We have these customers. They're rushing to pledge the minute the project opens. We can't change our business operations because of some comments!

Flenderson: Listen. I know something about pricing. People need to believe the price is fair. Most customers believe that we can have a reasonable profit, but if it seems we're taking advantage of them, they will turn on us.

Li: Yes, that makes sense.

Flenderson: It all comes down to value. We're offering a lot of value for a high price. But is the way we're doing it fair? Do customers believe they have some control over their choices? This afternoon was a mess, based on the comments I've read and what I've observed. That's mostly on me. But now we should do something about it. And that could mean correcting our mistake.

Oakley: Agreed.

Haverchuk: Strongly disagree. But ultimately, Marta, it's your call and I'll go along with that.

Li: Hmmm. We hired Jan to make these decisions. So, marketing manager, what should we do?

Please answer below questions. Thank you.

5. Consider the options available to ABG at the time of the emergency meeting (do nothing; do nothing but explain; open the USD 310 pledge level to an unlimited number; roll the price back to USD 250).

Perform appropriate financial analysis for each option.

Examine the role of company, competition, and customers on this decision.

Which option should ABG choose? Explain answer